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LONDON, Nov 5 (Reuters) - Market volatility, a stronger U.S. dollar and higher yields for long-term bonds are signs that markets are becoming more normal, rather than an indication of trouble, Bank of Canada Governor Stephen Poloz said on Monday.
Poloz, speaking to a business audience in London, pushed back against critics who complain that economic forecasts - including those from the Canadian central bank - are too optimistic.
As banks start to withdraw a decade’s worth of stimulus, long-term bond yields are rising, equity markets are returning to a more normal level of volatility and the U.S. dollar is strengthening to reflect the booming American economy, he said.
“These characteristics do not point to a gloomy economic outlook by any means - rather, they are welcome symptoms of normalization,” Poloz said in his prepared remarks.
He reiterated the Bank of Canada’s message that more interest rate hikes would be needed. The central bank has raised rates five times in the last 15 months after slashing them to almost zero to help cope with the Great Recession.
Poloz noted that long-term bond yields were starting to rise as stimulus was removed, which he said could reflect the fact “the market is becoming two-sided again” as central banks shifted interest rate risk back into the marketplace.
“Investors can no longer expect yields to be suppressed by extraordinary monetary policies,” he said.
Poloz acknowledged that recent plunges in equity markets had prompted some commentators to question “whether many economic forecasts, including ours, are too rosy”.
In fact, as rates go up and liquidity becomes more expensive, “it is only natural to expect more volatility in stock prices as this support is removed,” he added.
“If investors are coming round to the view that expected earnings ... need to be discounted by higher interest rates, it naturally lowers the price they are prepared to pay for a given stock,” Poloz said. (Reporting by Marc Jones and Tom Finn Writing by David Ljunggren Editing by Paul Simao)